Income-seeking investors often look for dividend stocks that have a big yield. And that can be a sound strategy.
But focusing on the rate of growth for a dividend can work well too. And that’s even if it means accepting a lower yield in the first place when buying the stock.
One of the advantages of a consistently growing dividend is that it often arises because of a strong underlying business. And a robust enterprise can help to keep the share price moving upwards over time.
That’s important. The bane of a dividend investor’s life can sometimes be capital erosion because of declining share prices. It’s frustrating to see the value of a portfolio treading water or declining despite a healthy torrent of incoming dividend payments.
A steady performer
So having a few dividend-growers can help to offset the problem. And FTSE 100 stock Bunzl (LSE: BNZL) could be a good candidate for further research and consideration.
The specialist international distribution and services company released its third-quarter trading update on 24 October. It covers the three months to 30 June.
Profit in the period was in line with directors’ expectations and the company expects to meet its forecasts for the year.
That’s just the kind of steady performance we’ve become used to from the firm. And resilience in the business is ongoing.
City analysts expect earnings to increase by almost 18% in 2023, and by around 2% the following year. Meanwhile, the anticipated dividend payments look set to rise by roughly 5% in 2023 and 2024.
However, third-quarter revenue declined by 4.8% at constant currency rates. But the directors said that outcome was driven by a continued fall in Covid-19 related product sales. There was also a reduced level of inflation benefit and wider “post-pandemic related normalisation trends”.
Nothing to worry about, I’d say. The business has carved out a strong niche for itself by supplying essential supplies for many other enterprises and organisations around the world. And because of that, Bunzl has some attractive defensive, cash-generating qualities.
However, one risk for investors is that there’s also a cyclical element to operations. And if economies suffer a severe downturn, turnover could start to dry up for the company. If its customer organisations stop ordering as much, Bunzl will certainly suffer.
Acquisitive expansion
Nevertheless, the company has long record of expansion. And a big part of that is the vibrant acquisition strategy.
One example occurred in September when Bunzl signed and agreement to acquire CT Group. It’s a distributor of surgical and medical devices serving health providers in Brazil.
But one of the worries with an acquisitive enterprise is that it might allow debt to get out of control. But Bunzl has been doing a good job of using its cash flow to invest in new assets and businesses. And net gearing is below 60% with interest cover from earnings running at a comfortable-looking 8.5, or so.
With the share price near 2,805p, the forward-looking dividend yield is just below 2.5% for 2024. That’s not an obvious dividend bargain. But I think the company is worth consideration for its tempting dividend-growth prospects.
